Shanghai is slowly emerging from a grueling COVID lockdown that has stagnated the city since March. Although the port of Shanghai, which handles one-fifth of China’s shipping volume, is operating full-time, it is running at critically low capacity. Many shipments have either been cancelled, postponed or rerouted to other Chinese mega-ports such as Ningbo-Zhoushan.
Due to fully reopen the city on June 1, the port is going to be in overdrive as manufacturers try to meet a backlog with severe knock-on effects around the world. It is an example of how global supply chains are destabilized in 2022 in ways that were not apparent at the beginning of the year. In January, we predicted ongoing disruption as the world economy continued to recover from the pandemic. In fact, the situation has become worse.
Apart from Shanghai, other major Chinese ports like Shenzhen have also been affected by the lockdown. And then there is Ukraine. The war has pushed prices of goods and services higher than expected for 2022, as well as added logistical difficulties.
According to the New York Federal Reserve’s Global Supply Chain Pressure Index, which takes into account issues such as freight rates, delivery times and backlogs, the supply chain is under unprecedented pressure — and has been deteriorating lately.
Global Supply Chain Pressure Index
Ukraine and food
Ukraine may not have been on many people’s radar as a major economic partner, but it was seen as a major obstacle to food supply chains long before the war broke out. This was due in large part to poor port infrastructure and a massive outgrowth of world maize and wheat supplies. So war was always going to have a devastating effect on international supplies.
You can get a good sense of the ripple effect on prices by considering a bag of fish and chips. Sunflower oil for frying was imported from Russia and Ukraine. The dough for the batter comes from Ukraine. Most of the fish used to be caught by Russian trawlers, but are about to be affected by sanctions. In all cases, this translates into decreased and/or increased prices.
Then there’s electricity and gas, whose prices have skyrocketed due to restrictions, affecting everything from deliveries to food production. And since Russia is a major player in the fertilizer market, even domestically grown potatoes will soon become more expensive.
Ukraine’s ports have been closed for months now, with Russia also being accused of holding food hostage for millions of people around the world. Developing countries are suffering the most, while the poorest of the rich countries are bearing the brunt. Even after the conflict ends, resuming food exports from Ukraine will not be easy. The capacity for land transport is limited and the sea, apart from the Russian blockade, is heavily mined.
Beyond food, the impact of the war on energy and fuel prices has made both production and transportation more expensive across the board, adding to the impact of China’s COVID problems. It has affected major Western players including Apple, Tesla, Adidas, Amazon and General Electric. The easing of restrictions in China is now allowing some, such as Volkswagen and Tesla, to resume production, but delays in logistics, affecting everything from healthcare to entertainment gadgets.
Around the world, several major ports experienced overcrowding in 2021, with the US west coast port of Los Angeles and Long Beach waiting for dozens of ships to dock. This dropped significantly in early 2022, but Shanghai port’s return to normal operations is likely to spark a torrent of westbound products as manufacturers do their best to clear order backlogs.
This will probably mean bottlenecks and delays at the western end in the coming weeks. Meanwhile, increased demand for ships will potentially affect freight prices: these rose at least fivefold in 2021 as suppliers struggle to meet post-COVID demand, and even lower in 2022 They are still about four times the pre-. Covid rate. Further hikes will put further pressure on consumer prices.
Even if there are no more lockdowns in China and the Ukraine crisis does not erupt, the global supply chain is clearly going to be under enormous pressure for the rest of the year. According to a recent UK survey, three-quarters of companies think 2023 will be even tougher.
For small businesses in particular, failure to adapt to the changing environment can put their existence at risk. At a time when recession fears are already in the air, this could make long-term economic recovery more difficult.
But there are reasons to be at least cautious optimists for the medium term. For decades, much of the supply chain was focused on cutting costs. Manufacturing was outsourced to specialist suppliers, ideally in countries with low labor costs. Firms keep inventory to a minimum and use short-term contracts to be as flexible as possible.
The weaknesses of this “just-in-time” system were exposed by COVID and the US/China trade war, and now many companies are placing more emphasis on being flexible and having a clear view of all suppliers in the chain. In this “just-in-case” model, some inefficiencies are considered an advantage rather than a waste of money.
Cost is still an important consideration, but product quality and availability are now considered more important. Companies are also diversifying their supplier base so that they are not dependent on China (with the added benefit of reducing their carbon footprint). US players such as Walmart, Boeing and Ford are moving to locations closer to their home markets, while several UK and mainland European companies are following suit.
Such a change should at least make the supply chain more robust in the future, even if it also drives up prices. At the same time, we see attempts to anticipate future crises. The European Union and the US plan to develop an early warning system to identify future global disruptions in semiconductor supply chains, which have affected everything from production to cars to video game consoles. More broadly, a recent UK report called on the government to set up a resilience task force and work with industry to increase visibility within supply chains.
That kind of approach would be worth implementing. The supply chain is going through its most turbulent phase in many years, but learning the lessons and getting used to it will mean that future worst-case scenarios can be avoided.